August 5, 2013
- When to start worrying: When a bureaucrat says, “We really have no concerns”
- How the Fed laid a trap for private equity investors… and now ambulance service is in limbo for people in 21 states
- Neil George describes how lukewarm economic numbers add up to good news for income investors
- Where inflation is “easing” to 214%… caveats about the dental crowns made possible by the new industrial revolution… the “pause” that relieves, if not refreshes… and more!
“We have experienced no degradation of service,” Rochester, N.Y., Mayor Thomas Richards says of the city’s ambulance fleet, “and we have been assured there will be none.”
“Currently, we really have no concerns,” says a similar assurance from Jill Franken, health director for the city of Sioux Falls, S.D.
But in Florida, WFTV-TV reports that communities in the same boat — including Orlando and Winter Garden — are “making backup plans” for ambulance service, just in case.
Hmmm…
For more than two years, we’ve forecast the “mother of all financial bubbles” would make its impact felt first on the local level — as cratering tax revenue would put the crimp on the services you’ve come to take for granted.
This morning brings an intriguing variation on the theme.
Rural/Metro Corp. filed yesterday for Chapter 11 bankruptcy. The company furnishes ambulance service to some 450 communities in 21 states.
It had humble beginnings in Scottsdale, Ariz., in 1948 — where there was no fire department at the time. An enterprising fellow named Lou Witzeman bought a fire engine and went door to door asking people to pony up an annual membership fee.
The model worked well. In 1969, Rural/Metro expanded into ambulance service. In 1978, Witzeman cashed out and sold the firm to its employees. The model expanded. In the 1980s, Rural/Metro was the subject of glowing articles in Reason magazine about the possibilities of private companies furnishing services that were usually in government’s purview.
Then Wall Street came along and screwed it all up.
Rural/Metro went public in 1993. It started contracting with city and county governments looking to outsource fire and ambulance service. The model of membership fees went out the door; now Rural/Metro was just another contractor feeding at the trough filled by taxpayers.
In 2011, the private equity outfit Warburg Pincus took Rural/Metro private, buying the firm for $728 million in cash and debt… mostly debt.
More than 70% of the purchase price — $515 million — was financed with bonds. Warburg piled on another $108 million in debt to acquire two smaller ambulance operators in early 2012.
But hey, no worries, right? The whole point of a leveraged buyout is to use those fat profit margins to service the debt.
It works great… until it doesn’t.
By forgoing its original membership-fee model, Rural/Metro found itself subject to the federal Emergency Medical Treatment and Active Labor Act.
EMTALA, passed in 1986, “requires hospitals to provide care to anyone needing emergency healthcare treatment regardless of citizenship, legal status or ability to pay,” according to Wikipedia. EMTALA is the reason the emergency room has become the primary-care clinic of choice for low-income Americans… and hospital “charity wards” are a quaint relic.
So Rural/Metro cannot deny emergency transport to uninsured patients. With unemployment persistently high, there’ve been more of those patients since the Warburg acquisition. And insurance companies are trimming their payments for patients who are covered.
In 2010, Rural/Metro collected 48 cents on every dollar of ambulance service it provided. In the nine months ended March 31, Moody’s Investors Service says that’s slipped to 33 cents.
Result: On July 15, Rural/Metro missed an interest payment of $15.6 million.
Three short weeks later and it’s in bankruptcy court. Moody’s reckons it’s the biggest leveraged buyout to go bust in the last two years.
“Default is always a risk in leveraged buyouts,” says today’s Wall Street Journal, “because acquirers boost the debt loads of the companies they buy to help pay for them. But it is uncommon for a deal to crater so quickly.”
Not every bureaucrat in communities served by Rural/Metro is as sanguine as the ones quoted above. The press releases out this morning from the firm promise business as usual, but if Chapter 11 reorganization does end up affecting services, “I’m not sure what other option is out there,” says Gene Sanford, the auditor for Union County, Ind., population 7,500.
Parked for good?
The line of blame goes right back to the Federal Reserve: 4½ years of zero interest rate policy spurred Warburg to take on nosebleed levels of debt acquiring Rural/Metro… and now people in 21 states are wondering if the ambulance will be there to pick them up when they need it. Maybe not today, but sometime. Heckuva job, Bernanke.
Our warning stands: The mother of all financial bubbles will be felt close to home first. If you’re not ready… or if you’re not sure you’re ready… you’d do well to check out this warning from our executive publisher, Addison Wiggin. While there’s still time.
The week begins with a mixed bag for the major U.S. stock indexes. The Dow and the S&P have pulled back slightly from Friday’s record-high closes.
But at 3,692, the Nasdaq has inched up to levels last seen during its epic slide in 2000.
“With Bernanke and crew providing a bond-buying backstop,” wrote Options Hotline’s Steve Sarnoff last night, “will the rise continue unabated?” Sarnoff’s Skeptic Squad stands on alert.
“Though there may be more upside, the law of gravity still applies to markets. When institutions turn to selling, markets will correct.”
The big economic number of the day is the ISM nonmanufacturing index. At 56.0, it’s well above the 50 dividing line between expansion and contraction — indeed, the best reading in the service sector since February.
Unfortunately, the “prices paid” component of the index is also zooming up — an early sign of squeezing profit margins if the rise becomes a trend. But for the moment, it remains an outlier.
The raft of economic numbers in recent weeks adds up to good news for the income plays tracked by our Neil George.
“Not only is the U.S. economy not on a tear right now,” he says — “it’s also not experiencing any major inflation pressures.
“The Fed is keeping a close eye on GDP data — particularly personal consumption expenditures (PCE) — to determine when to stop buying new bonds and raise interest rate targets.
“The PCE came in at 0.8% — down from 1.3% the prior quarter, continuing a two-year trend of falling inflation rates. Most importantly, 0.8% is nowhere near the 2.5% threshold the Federal Open Market Committee wants to see before tightening money.
“So we have weak GDP and lower inflation.” Add to that Friday’s unemployment number of 7.4% — still well above the Fed’s target of 6.5%.
“In short, there’s little chance the FOMC will stop stimulating the bond market and the overall economy.”
[Ed. Note: These developments are excellent news for an income-investing niche that allows you to rack up substantial tax-free gains. Play it Neil’s way and you can start collecting three checks every month – and the IRS can’t touch them.
Too good to be true? Nope, even the Supreme Court has affirmed this strategy. Learn how to start collecting your own checks right here.]
Gold is testing $1,300 to start the week. As we write, the bid is down a little over $12, to $1,301. Silver’s at $19.71.
And then came the currency controls…
Syria’s president Bashar al-Assad has all but banned the use of foreign currencies. “It is prohibited to make payments, reimbursements, commercial transactions and any other commercial operation in foreign currency or in precious stones,” says the decree quoted by the state news agency SANA.
“Did I hear someone in the bazaar accepting dollars?”
When civil war broke out in March 2011, the Syrian pound fetched 47 to the dollar. Now it’s 200.
Around this time last month, we noticed inflation in Syria was running 92% a month, in the estimation of Johns Hopkins economist Steve Hanke. Black-market currency transactions were starting to be punished with 10-year prison terms.
Now all currency transactions are of the black-market variety.
At least the inflation rate has eased a bit. Hanke’s latest estimate — based on the black-market currency trade, heh — is an annual rate of 214%.
Well, it’s better than 337% a month ago…
“The 3-D milling machines are good, not great,” writes a dentist with a qualifier after our up-close-and-personal encounter with the new industrial revolution at the dentist’s office.
“My old-fashioned lab man can make a crown that is better looking than the machine. If your tooth isn’t one of the standard colors sold in the ceramic blocks… it can’t match it.”
“The PFM (porcelain fused to metal) crown,” another dentist writes, “will not only fit better but last longer, being less likely to leak and/or fracture. For back teeth, or front depending on your fashion sense, a gold crown is even more superior and an excellent way to take your gold to the grave with you if you have trusting relatives.
“But you are right, it is quicker. Quicker to need replacing, that is.”
The 5: Yeah, we know, it’s not a permanent fix. We’re just grateful at this stage to be rid of leaky silver fillings. One thing at a time…
“I have a comment and question about 3-D printing,” writes a reader on the broader subject.
“I have not used it and have not yet seen it. However, once this becomes more prevalent and there are businesses that fulfill the needs one requires, what is preventing you from manufacturing your own drugs?
“Why pay Big Pharma $95,000 per year for one cancer drug if you can make it? Could this eventually become a primary factor that frees us from the grip of Big Pharma? Probably too good of an idea to become reality.
“I have not yet seen The 5 discuss the parameters on 3-D printing, those limitations beyond which it cannot go.”
The 5: “What Apple did for music,” University of Glasgow chemist Lee Cronin said in a recent TED talk, “I’d like to do for the discovery and distribution of prescription drugs.”
“According to Cronin,” reads a recent account in The Week, “users would go to an online drugstore with their digital prescription, buy the ‘blueprint’ and the chemical ‘ink’ they need and then print the drug at home with software and a 3-D molecular printer. Medicine’s entire distribution model could, in essence, be flattened.”
The possibilities are endless. As we mentioned on Friday, our tech specialist Ray Blanco has pinpointed four companies on the bleeding edge of the “new industrial revolution.” Learn how to position yourself for the biggest early-stage gains at this link.
“I want to see your video presentations,” writes our final correspondent, “but they are too LONG!
“I will watch them again when an addition is made to the presentation. Two buttons labeled PAUSE and RESUME. I can then take care of any necessary bodily functions or any task needing doing immediately.”
The 5: We’ve already done you (and your bladder) one better. Just click on the play icon that appears any time you mouse over the moving text.
Cheers,
Dave Gonigam
The 5 Min. Forecast
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